THE JOINT AND SEVERAL LIQUIDATORS OF DAYS INTERNATIONAL LTD (IN LIQUIDATION) v. MAHESH NANIK DAYARAM

HCCW 298/2011 & HCCW 299/2011
(HEARD TOGETHER)

[2021] HKCFI 3763

HCCW 298/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO 298 OF 2011

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IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO 299 OF 2011

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D E C I S I O N

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1.  On 8 and 10 March 2017 the Liquidators of Days International Limited and Days Impex Limited (“Companies”) issued summonses in the respective winding up proceedings of these two Companies seeking the following relief pursuant to sections 275 and 276 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32) (“Ordinance”):

(1)     A declaration that the Respondent was knowingly a party to the carrying on of the business of Days Impex Limited (the “Company”) with intent to defraud creditors of the Company by procuring the Company to apply for import loans aggregating US$23,875,274 (the “said Sum”) over the period March to September 2011 (the “said Import Loans”) and/or misapplying the said Sum;

(2)     A declaration that the Respondent as an officer of the Company was guilty of misfeasance, breach of duty and/or breach of trust in relation to the Company by procuring the Company to apply for the said Import Loans and/or misapplying the said Sum;

(3)     An order that the Respondent do pay the Applicants the said Sum or such amount as the Court deems fit, with interest at such rate as the Court thinks just;

(4)     Alternative to (3) above, an order that the Respondent do contribute the said Sum or such amount as the Court deems fit to the assets of the Company;

(5)     Further or other relief; and

(6)     Costs of and incidental to this Application be to the Applicants.

2.  The Respondent issued on 22 July 2021 summonses in both proceedings (“Disposal Summonses”).  The Respondent seeks the determination of preliminary issues with a view to striking out the Liquidators’ applications on the grounds that the Liquidators have failed to establish that the Respondent was a director or an officer of the Companies.

3.  It would appear that the applications were issued because the Respondent has assumed that sections 275 and 276 apply only to directors or other office holders of a company.  The reason for this is that the heading of section 275 reads as follows: “responsibility of directors for fraudulent trading” and section 276 is headed “power of court to assess damages against delinquent officer, etc”.

4.  The body of the two sections, however, clearly extend the application of the provisions beyond that of individuals who are directors or what as a matter of conventional company law taxonomy would be described as officers of companies.  Section 275(1) is in the following terms:

“(1) If in the course of the winding up of a company it appears that any business of the company has been carried on with intent to defraud creditors of the company or creditors of any other person or for any fraudulent purpose, the court, on the application of the Official Receiver, or the liquidator or any creditor or contributory of the company, may, if it thinks proper so to do, declare that any persons who were knowingly parties to the carrying on of the business in manner aforesaid shall be personally responsible, without any limitation of liability, for all or any of the debts or other liabilities of the company as the court may direct.

(1A) On the hearing of an application under subsection (1) the Official Receiver or the liquidator, as the case may be, may himself give evidence or call witnesses.”

5.  It is, in my opinion, therefore, quite clear that section 275, unlike the section, which it replaces, applies to persons other than directors. It clearly extends to any individual who was knowingly party to the carrying on of the business with an intent to defraud creditors or others or for any fraudulent purpose.  The Respondent was not a de iure director (I ignore the question of whether it extends to a shadow director) of the Companies and assuming that he had to be in order for section 275 to be applicable, the Respondent would be correct that the claim against him under section 275 would be unsustainable.  However, this is not the case.  What his precise position was within the Company is in itself irrelevant.  What is relevant is whether there was an intentional scheme or actions to defraud creditors or others and, if so, whether he was knowingly a party to it.  My understanding was that by the end of the hearing the Respondent (who appeared in person) accepted that his original argument that presumed section 275 only applied to directors was probably wrong.  The applications before me was to decide if there should be a preliminary issue to determine the applicability of section 275.  Ordering the trial of a preliminary issue rather than all issues being dealt with together is exceptional[1].  Given the complexity of the claim under section 275, it seems to me quite clear that it is not suitable for determination separately and in advance of a trial of the entire application.

6.  Section 276(1) and (1A) is worded differently:

“(1) If in the course of winding up a company it appears that any of the persons specified in subsection (1A) has misapplied or retained or become liable or accountable for any money or property of the company, or been guilty of any misfeasance, breach of duty or breach of trust in relation to the company which is actionable at the suit of the company, the court may, on the application of the Official Receiver, or of the liquidator, or of any creditor or contributory, examine into the conduct of the person, and compel the person to repay or restore the money or property or any part thereof respectively with interest at such rate as the court thinks just, or to contribute such sum to the assets of the company by way of compensation in respect of the misapplication, retainer, misfeasance, breach of duty or breach of trust as the court thinks just.

(1A) The following persons are specified for subsection (1)—

(a) a person who is or has been an officer of the company;

(b) a person who is or has acted as a provisional liquidator or liquidator of the company;

(c) a person who is or has acted as a receiver or manager of the property of the company;

(d) a person, other than a person falling within paragraph (a), (b) or (c), who is or has been concerned, or is taking or has taken part, in the promotion, formation or management of the company.”

7.  Section 276(1) applies to any person who satisfies the definition of “officer”.  Officer is defined in the section 2 of the Ordinance to include a director or manager of the company.  “Manager” is also defined.  It means a person, who is under the immediate authority of the board of directors and exercises managerial functions.

8.  The Respondent argues that he was not a manager and, therefore, section 276 cannot apply to him.  It seems to me that on the basis of the evidence that has been filed, that this is also not an issue suitable for determination as a preliminary issue.  It is clear from the Respondent’s own evidence that he certainly had some managerial functions in the Companies, which he argues were controlled by his Father.  The Respondent was also convicted of nine counts of conspiracy to defraud arising from the subject matter of the Liquidators’ claims.  He and his Father’s appeal was dismissed.  Leave to appeal to the Court of Final Appeal was also dismissed.  In these circumstances it also seems to me clear that this claim is not suitable for determination in advance of a full trial.

9.  I, therefore, dismiss the Respondent’s two Disposal Summonses. I will make a costs order nisi that the Respondent pays the Applicants’ costs forthwith with a certificate for counsel, such costs to be taxed if not agreed.